SINA: A "Must-Own" China Play

Gregory Spear uses a unique approach to
selecting stocks; he monitors the financial newsletter world, and looks for a
"consensus" among those with the best performance. From there, he compiles a
buy list of expected top performers. Here's one he calls a "must-own"
stock.

"Over the last few years, investing in
China has resembled a 'fad,' and as we all know, fanaticisms of any sort always
cut both ways. When the game is on, performance can be outstanding, but when the
herd stampedes for the exits at the first sign of trouble in paradise,
group-think can drive such stocks to deeply oversold levels. In the markets,
this phenomenon is called herding and it is what creates bubbles. What was once
universally loved can just as easily become objects of scorn.

"SINA (SINA NASDAQ)
came
public in the heyday of the tech
party of 1999. When the bubble collapsed, Sina fell 98% from its post-IPO high
to trade at about a buck a share in October of 2001. Then, over
the next two years, SINA made a spectacular climb back up the ladder to recapture former
glory. Why? There was actual value there. The company was growing like a weed
but had the breeding of a wild rose, as it was becoming
extremely profitable. SINA then peaked again in January 2004 near its old highs along
with the Nasdaq and has been in a correction since. Now, two things are lining up to
call our attention to the stock. First, having fallen 62% from its January 2004high,
SINA appears to be in the process of completing that corrective process. Second,
there is a clear fundamental driver behind the rally. SINA has been
primarily a play on mobile wireless services. But the company is diversifying
into the online gaming market and that strategy has a great deal of potential.

"The driver for the company is known
as MMOGs, or 'Massively Multiplayer Online Games'. There is also
a
more
creative and all-absorbing variation called Massively Multiplayer Online
RolePlaying Games. In the online game world, having more than 10,000 subscribers
qualifies as 'massive', and there are perhaps two dozen such games being played
in the world right now. They are being played mainly on desktop and laptop PCs,
but they are coming to mobile platforms (smartphone & PDAs) as the wireless
broadband wave moves inexorably around the globe. By the way, online gaming is
not online gambling, although it is addictive and usually involves some sort of
violent content. Further, we’d caution that governments in Asia have begun to
enact measures to protect their youth from online excess.

"Meanwhile, SINA has 102 million
registered users, 12 million active users for a variety of fee-based services,
and 3.6 million gamers. Sina is just entering the gaming business, having
launched the online gaming portal iGame, in July. The question for investors is
how to evaluate the earnings potential of these gaming subscribers, which have
until now been playing for free. While online gaming is
a very high margin affair, with gross margins north of 85%, the
overall market is still comparatively small, generating just $160 million in 2003.
But there is no question gaming is growing exponentially. Competitor Netease,
which gets 2/3 of its revenue from gaming, earned about $18 million in the
last quarter from MMOGs. For the 3rd quarter, its game base grew 20% sequentially to
555,000. Sina is now trying to leapfrog NetEase.

"With a
market cap just slightly larger than Netease, SINA faces the crucial task of
converting 3+ million free users to paying customers. If they execute well, this
will dramatically increase shareholder value. Clearly, even if they convert just 15%,
they will match Netease’s current level. If Sina can grow paying gaming
subscribers into the low single-digit millions, and maintain its margins, a
similar market multiple would be, well, staggering. With the stock trading about 20
times this year's earnings, in a country where more than 90% of the population
is still offline, we are betting that Sina will succeed. We reiterate our
must-own recommendation."